In his most recent report, respected asset allocation consultant Andrew Smithers concludes that basically all bonds are overpriced (see table below), whether they be guvvies (government bonds), corporates, or inflation-protected. That's pretty unfortunate, especially when you consider that stocks are also broadly overvalued. So what's left for an investor?

Investment

Yield

10-year Treasury bond

3.27%

10-year Treasury Inflation-Protected Securities (TIPS)

1.08% [real]

Investment-grade corporate bonds*

4.92%

High yield corporate bonds*

9.79%

Treasury bond data as of Dec. 1, 2009. Corporate bond date as of Nov. 30, 2009.
*Average redemption yield.
Source: Bloomberg

Cash is the worst asset -- except for all the others ...
Both stocks and bonds currently promise poor returns because investors are bidding prices up, desperate to put their cash to work anywhere there's a hope of earning something greater than zero. But whether these assets will end up working for or against them remains to be seen. Cash has some interesting attributes: It presents no risk of capital loss, and it leaves investors with flexibility.

Investors don't need to choose between buying risky assets immediately or holding cash for the next 10 years. When the former are overvalued, one can simply hold cash until prices become more attractive. In my opinion, we certainly won't have to wait 10 years for that to happen.

Stockpicking is an alternative
One alternative, for investors with the necessary time and the expertise, is buying carefully selected, well-priced stocks (yes, there are still some out there). The following shares, for example, are in the top 10% of the S&P 500 in terms of their forward earnings yield. (They are not recommendations -- please do your own due diligence.)

Company

Forward Earnings Yield

Long-Term Earnings Growth Estimate

ConocoPhillips (NYSE:COP)

11.2%

7%

UnitedHealth Group (NYSE:UNH)

10.6%

12.5%

Eli Lilly (NYSE:LLY)

12%

5.3%

Pfizer (NYSE:PFE)

12.3%

(0.3%)

Loews (NYSE:L)

11%

-

Constellation Brands (NYSE:STZ)

9.7%

9%

AFLAC (NYSE:AFL)

11.2%

14.3%

Source: Capital IQ, a division of Standard & Poor's and author's calculations, based on data from same.

The game plan
Unless you're investing in individually selected stocks, rather than through index funds, I recommend being underweight the broad U.S. stock market and bonds. Holding cash doesn't make sense unless none of the alternatives do. By and large, that's  the case right now. When -- not "if" -- asset prices become more consistent with economic reality, that cash will come in mighty handy.

Be wary of pundits who are goading investors into chasing returns. Here are three more reasons you're being set up to fail.

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Fool contributor Alex Dumortier, CFA has no beneficial interest in any of the companies mentioned in this article. AFLAC and UnitedHealth Group are Motley Fool Stock Advisor recommendations. Pfizer and UnitedHealth are Motley Fool Inside Value picks. The Fool owns shares of UnitedHealth. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.